The case of the Ever Given blocking the southern end of the Suez Canal for six days in March of 2021 made front page headlines around the world.
While a vast container ship wedged diagonally across the Suez Canal certainly provided some dramatic images, the actual incident itself was not that remarkable. Little damage was inflicted on either the canal, the ship, or its cargo; there was no fire or pollution; and, fortunately, no one was killed or injured as a direct result of the incident.
Instead, what made the story so newsworthy, was the blockage of one of the world’s busiest trade routes and the potential for massive trade disruption.
Along with the Panama Canal, Straits of Hormuz, Straits of Malacca, Bosporus, Gibraltar Strait, and English Channel, the Suez Canal is one of the most significant and sensitive trade routes in the world. About 19,000 ships pass through the Suez Canal (north- or south-bound) each year, carrying an estimated 12% of all global trade.
These trade routes, where ships come together in tightly managed traffic schemes, are described as “choke points” – and the Ever Given incident perfectly demonstrated the appropriateness of that term. By the time the ship had been freed and the Suez Canal re-opened, over 400 ships were queued or stuck, waiting to make their transit. In addition, a number of ships had already decided to change course and re-route via the Cape of Good Hope, adding anything between 7 to 15 days to their scheduled voyages (depending on ship type and speed).
In those first few days, while the ship was still aground, experts began to make some dire predictions. Lloyd’s List, for example, provided data to show that trade worth an estimated US$9.6 billion was being held up every day. This equated to about US$400 million per hour. Analysis by Allianz Global Corporate & Specialty indicated that the impact on trade growth could be a reduction of between 0.2% – 0.4%. It is actually difficult to make sense of these figures — do they represent an actual loss or are they merely a measure of the values affected?
These figures were repeated, without real analysis, by the world’s press — largely because they gave further impact to their stories — and few people were therefore surprised when the Suez Canal Authority (SCA) presented an initial claim of US$916 million. This amount included significant claims for “loss of reputation” and a “salvage bonus”. It fitted the narrative that this was a “catastrophic” incident.
The negotiations with the SCA to allow the ship to continue her voyage were clearly difficult. The UK P&I Club insuring the Ever Given's owner for third-party liabilities announced on July 7 that a formal agreement with the SCA had been reached. The Ever Given left its Bitter Lake anchorage that had lasted over three months after the initial grounding, and arrived in the Port of Rotterdam, Netherlands, on July 29 and the Port of Felixstowe, in the UK on August 3.
The precise details of the “fair and amicable settlement” with the SCA are not yet in the public domain, but it is expected that the owners and their insurers will have achieved a significant reduction on the amount first claimed by the SCA.
Of course, settlement with the SCA is by no means a conclusion for many of the parties affected by this incident. Multiple other claims have arisen and the legal implications will be complex. Some of those concerns are considered in the section below. They help to give an idea of the potential impact this incident could have on the insurance market.
Salvage was undertaken by Smit Salvage, Nippon Salvage, and the SCA. Smit and Nippon were engaged by the ship owners, but there are reports that the Lloyd’s Open Form, a widely used salvage agreement, was not actually signed. The SCA, on the other hand, operated under rights set out in the Suez Canal’s “Rules of Navigation”. Article 59 (Accidents) specifically states that when a ship runs aground, Suez Canal officials “alone” are empowered to order and direct all operations required to get the vessel afloat.
The work largely involved digging out the bow and stern sections, some dredging and pulling the ship into the canal, using high-powered tugs. This work was undoubtedly difficult, but does not appear to have been unduly hazardous or technically challenging.
Once known, the total claim for salvage will form part of General Average (GA) — assuming that claims will be adjusted in accordance with the York-Antwerp Rules 1994 (rather than 2004, 2016, or other versions).
Contributions to General Average (GA) will be sought from cargo interests (including owners of the containers, full, or empty), the ship itself, and the owners of the bunkers on board. This will be a complex matter, given the considerable number of containers on board (about 18,300). The cash deposit for GA was set at 25% of cargo values, according to Clyde & Co, the international law firm representing a large number of cargo interests.
Cargo’s proportion will be borne by cargo insurers (assuming all of the cargo was insured) and the ship’s proportion will be covered by Mitsui Sumitomo Insurance Company, the hull underwriters.
It is, of course, possible that cargo interests will contest the amount paid to the SCA and/or they will seek to argue that there was a breach of the contract of carriage by the ship owner, such that cargo should not have to contribute to GA at all. If the breach of contract arguments are successful, GA claims would be covered under the protection and indemnity (P&I) insurance.
The cost of wages and maintenance of crew arising from prolongation of the voyage may also be considered in the GA adjustment.
Some cargoes, such as perishable/refrigerated cargoes, may have been damaged as a result of the considerable delay that followed the grounding. If so, those with an interest in cargo are likely to bring claims against the ship owner for the damage suffered. However, whether or not they succeed will depend on the strength of the ship owner’s defenses under the Hague-Visby Rules. These could include, for example, “error in navigation” (due to crew or pilot error in navigating the ship), or “perils of the sea” (due to the sudden, strong gusts of wind).
The non-perishable cargoes were probably not damaged, only delayed — and because pure economic loss due to delay is not generally recoverable under the Hague-Visby Rules, such claims are unlikely to succeed against the ship owners.
In other words, the number and level of cargo claims faced by the ship owner is likely to be limited. If any such claims were sustained, they should be covered by the P&I Club and should be subject to limitation (see below).
Hull damage will be covered by the hull underwriters — though it is possible that the damage was so insignificant that it will fall below the applicable deductible. If any damage was caused, as a result of attempts to re-float the ship, the cost of that damage could be included in the GA adjustment.
It is not known whether settlement with the SCA included a fine by the Egyptian authorities. If there was a fine, it would be covered by the P&I insurance on a discretionary basis (see Rule 2, Section 22 of the UK P&I Club’s Rules).
Any additional costs relating to the crew (such as repatriation and substitution), over and above what the ship owner would have had to pay anyway, should be recoverable under the P&I policy.
The cost of repairing damage inflicted on the Suez Canal when the ship ran aground would form a P&I claim (as a “damage to fixed and floating objects” claim). It formed part of the settlement with the SCA to release the ship.
The Suez Canal was further damaged as a result of the work undertaken to salvage the ship. That cost may, therefore, ultimately be included in the GA adjustment.
Apportioning the damage caused by the grounding and the work to remove the ship should be relatively straight-forward and will be assessed by the average adjuster. It should not, therefore, prove a matter of dispute.
Estimates of the daily loss of revenue for the Suez Canal range between US$14 million – US$15 million. The Suez Canal was closed for nearly a week, so, if those estimates are correct, the loss of income as a result of the grounding would total between US$98 million and US$105 million. Arguably, however, little of this revenue was actually lost — only deferred — as the vast majority of ships waited, rather than diverted around the Cape of Good Hope. This claim will have been negotiated with the SCA by the UK P&I Club. The settlement amount is not known.
As mentioned, the original US$916 million claim from the SCA, included a significant element for loss of reputation. During the court hearings in Egypt, while the ship was under arrest, stories emerged about the actions of the two SCA pilots, who apparently disagreed among themselves over how to deal with the effect of the wind on the ship, and disagreed with the Master when he tried to intervene. It was clear that evidence from the ship’s voyage data recorder had a critical impact on the negotiations. It may be inferred that the SCA was reluctant for events on the bridge, prior to the grounding, to be aired in public. It is not known whether anything was actually paid to the SCA, by way of settlement of this claim.
The way in which the settlement with the SCA has been structured (damage to the canal, salvage work, loss of revenue, a possible fine, and loss of reputation) will be a matter of considerable importance for cargo interests. This is referred to by Clyde & Co. in their Ever Given Update, issued on April 7, where they state, in paragraph 7:
“There will be an interesting dynamic as to whether the sums paid are categorized as salvage (in which case, recovery pro-rata to values will be sought from cargo in GA, and H&M will obviously pay the proportion due from the ship), or categorized as payments for the damage to the canal/loss of revenue and/or fines, in which case, they will fall for P&I and not be part of the GA. Since the SCA is likely to be the recipient of all those sums, they may be less interested than cargo interests, in the technical categorization of any sums paid.”
Theoretically, there are numerous potential claims from numerous parties who suffered losses arising out of the delay. These include the owners and charterers of other ships, who were forced to wait or deviate, due to the blockage of the Suez Canal.
In English law, such claims for pure economic loss are generally not recoverable because the claims are considered to be too “remote”. However, the scale of the losses for some ship owners (especially large container operators, who had multiple ships delayed) may have been considerable. One such owner has estimated losses directly attributable to the incident at almost US$20 million. Many of them may already be consulting lawyers to see if there is a more favorable jurisdiction in which to bring their claims.
Ship owners who have taken out strike and delay cover will probably be able to claim their losses from insurers — including those who diverted via the Cape of Good Hope, if they have done so in order to avoid or minimize delays along the Suez Canal. Those strike and delay insurers, having paid any such claims, would then be subrogated to the rights and remedies of the assureds in pursuing compensation from the owners of the Ever Given.
Finally, there is the complex issue of limitation.
The exact status of the Limitation of Liability to Maritime Claims (LLMC) 1976 in Egypt is uncertain. Under that convention, were it to apply to this incident, the ship owner of the Ever Given should be able to limit its liability to about US$31.3 million.
However, on April 1, the ship owners commenced proceedings in the High Court in London, seeking to limit their liability (under the 2012 amendment to the 1996 Protocol to the LLMC) to an estimated US$114 million — a much higher limit.
This was clearly a tactical move on the part of the ship owners: It avoided proceedings in Egypt (where the ship owner’s right to limit was less certain), and it offered claimants (including the SCA) a higher potential fund.
Of course, the only claim from the SCA that was potentially subject to limitation under the LLMC, concerned the damage to the Suez Canal inflicted at the time of the grounding and any economic losses incurred. Claims for salvage and GA contributions (together with any fine) are specifically excluded from LLMC.
Given that the ship owner appears already to have settled the Suez Canal damage and economic loss claims from the SCA, these should now be framed as a credit in the limitation action.
While much remains unknown, there is a myriad of potentially complex claims issues that may impact the amounts recoverable from insurers. However, due to the way in which claims are apportioned between the interested parties, the almost certain right of the ship owner to limit liability, the probable benefit of Hague-Visby defences and the difficulty of bringing pure economic loss claims, the significant losses arising from this incident are likely to have been widely spread among numerous insurers.
The Ever Given incident raises many key issues. First, there is the question of whether the Suez Canal is too small for use by mega container ships.
At its narrowest, the Suez Canal is a mere 200 meters wide: The Ever Given’s beam is 59 meters, which leaves just 70 meters on each side of the ship. The aerial photographs of the incident show vividly how narrow the Suez Canal is at the point where the ship ran aground. There is almost no room for error.
Of course, it may be argued that the Master should have waited, given the strength of the wind at the time (in excess of 40 mph). It has also been reported that there was a discussion about the weather between the pilots and the Master of the Ever Given, but it is not known precisely what was said. In reality, however, it is highly unlikely that the Master would have proceeded without the pilots’ specific agreement.
The owners of very large container ships, and the SCA, will doubtless be assessing the probable cause of the grounding and deciding how to avoid such accidents in future. It is possible that pilots and masters will be far more cautious about entering narrow stretches of the Suez Canal whenever there is a risk of high winds.
In May, 2021 — even before the Ever Given had been freed — the SCA announced that a 19-mile stretch of the Suez Canal would be widened by 40 meters and deepened by about 2 meters. The expansion works are expected to take two years. These plans had been in place for some time, but the Ever Given incident, seems to have given fresh impetus to the need to undertake the work.
This incident must have been very sensitive for the SCA. They are keenly aware that most ship owners have a choice whether to use the Suez Canal or not (although this choice may be limited by any specific orders from the ship’s charterers). Over the last seven or eight years, there have been numerous articles discussing the relative merits of the Suez Canal and the Cape of Good Hope. When bunker prices are low and time is not of the essence, the Cape may be considered a better option by some owners.
It is estimated that the transit charge for a ship, such as the Ever Given, is in the region of US$1 million. Although this may seem to be high, it only amounts to about US$56 per loaded TEU (20 foot equivalent unit) — and traveling via the Cape of Good Hope would have added 7 – 15 days to the voyage time — a factor that is absolutely critical to the “just in time” world of container shipping. A major container line would probably only avoid the Suez Canal, if all of their competitors did the same.
Every year, there are a number of incidents in the Suez Canal. Most of them are not serious and none of them has previously resulted in a long-term blockage. However, if that were to happen again (whether or not a mega container ship was involved), what would be the consequences of a much longer delay? For example, what would have happened had the Ever Given remained embedded in the canal’s banks and the only option for re-floating the ship was to remove the top tiers of containers?
The salvors are reported to have had a back-up plan involving a massive crane that would have been brought down from Port Said. The precise details of this plan are not known, but the extra time required to free the ship was estimated at a minimum of three to four weeks. Had the ship suffered structural damage and been at risk of breaking its back, the delay could have run into months.
Irrespective of the cost of salvaging the ship and cargo, the SCA’s claim for economic losses would have increased substantially and any arguments about revenues merely being delayed by a few days would have been impossible to sustain. A month’s delay could easily have produced a claim against the ship owners approaching US$500 million.
Claims from cargo interests might have increased — but not dramatically. Most non-perishable cargoes would not deteriorate physically and losses arising out of delay are not generally recoverable under the Hague-Visby Rules. In any case, assuming that limitation was not broken, the limit for a ship of this gross tonnage under the 2012 amendment to the LLMC 1996 Protocol is fixed at US$114 million.
Other third party ships would be forced to divert via the Cape of Good Hope, or via other routes, and their owners and charterers would incur losses — but, as explained above, in most jurisdictions “pure economic loss” is not recoverable, as the claims are considered to be “too remote”.
GA claims would increase, largely because the salvage cost would increase. However, providing the ship owner could show that there had been no breach of contract, or there was a good defense to such a claim, then cargo would have to claim their contributions from their insurers, or put up acceptable surety to guarantee payment, in the event they were uninsured.
In other words, although the claim would have increased significantly, it would have been widely spread amongst the parties and their numerous insurers. Such an incident would have caused a severe disruption to world trade, and would probably have resulted in shortages and some short-term price rises, but it would have been more inconvenient than catastrophic. The claim under the International Group Pooling arrangement and their reinsurers would have been significant, but manageable.
Some believe the only way to avoid complete closure of the Suez Canal, following an incident such as the Ever Given, is to create a two-way system along the entire length of the canal. At the moment, two-way traffic is only possible for 22 of the canal’s 120 miles.
Unfortunately, given the colossal cost and the time that such a project would take — along with Egypt’s reluctance to allow foreign investment in Suez Canal development — that is highly unlikely. Furthermore, it is difficult to see how such a development would be financially viable, as it would not significantly increase usage and could not be financed by substantially increasing tolls.
Although plans to widen the Suez Canal are welcome and will certainly lessen the risk, it must be accepted that an incident like the Ever Given could happen again.
If you have questions regarding the effect of the Ever Given on your business or other marine insurance-related issues, please contact your Marsh Specialty advisor.